Indian Bonds Set for Selloff as Oil, US Yields Surge; Fresh Debt Supply Looms

Indian government bonds are poised for a weak opening on Friday, pressured by a sharp rise in global oil prices and US Treasury yields that has revived concerns over inflation and interest rates.

The benchmark 6.94% 2036 bond ended the previous session at 6.9762%, a three-month high, and is expected to trade in the 6.96%–7.02% band, according to a private-bank trader. "Bulls have lost confidence and the benchmark yield rising above 7% seems an inevitable reality for now," the trader said.

The selloff in US Treasuries deepened during Asian hours after data showed the US producer price index rose 5.4% over the 12 months through August, lifting expectations of a Federal Reserve rate hike next week. The 10-year US yield hovered around 4.97%, its highest in almost three years, while bets on a 25-basis-point increase on Wednesday jumped to 72% from 62% earlier, according to the CME FedWatch tool.

Crude oil prices moved comfortably above $100 per barrel as an escalating Middle East conflict continued to drive up global fuel costs and disrupt energy supplies. Iran-aligned Houthis seized control of Yemen's port of Mocha, posing a further threat to Red Sea traffic, while Gulf traffic remained restricted through the Strait of Hormuz amid rising tanker attacks in the region.

India, the world's third-largest oil importer, faces a swelling import bill and renewed inflationary pressure from higher crude prices.

Investor appetite will also be tested by fresh debt supply, with New Delhi set to sell 320 billion rupees ($3.35 billion) of bonds, including a new 30-year paper.

Overnight indexed swap rates are set to spike, tracking Treasury yields and oil prices. On Thursday, the one-year rate ended at 6%, the two-year at 6.2050%, while the liquid five-year rate rose 4 basis points to 6.52%.